By Mike Jones
NZD
A double-dose of positive news on the global economy lit a rocket under the NZD on Friday. The NZD/USD soared around a cent to 0.8120, reversing all of the previous fortnight’s declines.
China finally delivered on the fiscal stimulus the market had been waiting for, bolstering hopes for a fourth quarter bounce in Chinese activity.
A few hours later, underwhelming US jobs figures had investors licking their lips in anticipation of more Fed stimulus.
As fears of a sharp slowing in the global economy subsided, global equity markets rallied, commodity prices climbed, and risk aversion gauges declined. In currency markets, investors ditched the ‘safe-haven’ of the USD and JPY in favour of the EUR, AUD, and NZD.
Of course, Friday’s ‘good’ global news comes hot on the heels of the ECB’s new action plan to combat rising European borrowing costs.
Overall, investors are now much more confident that policy makers can ride to the rescue of the global economy. This is being reflected in a renewed appetite for ‘risk’. Indicative of such, our risk appetite index (scale 0-100%) is riding high at 74.5%, having plumbed lows around 63% last week.
We suspect buoyant risk appetite and positive momentum will carry the NZD/USD even higher this week. A re-test of August’s 0.8145 highs looks likely.
However, there is some significant event risk for the NZD this week. Most notably, the FOMC is meeting on Friday. As already noted, hopes are high another stimulus programme will be announced (see Majors).
Closer to home, the RBNZ meets on Thursday. The OCR will undoubtedly be left at 2.5%. However, we can probably expect a parting shot at the high NZD from Governor Bollard, at what will be his last hurrah as RBNZ chief.
After all, the TWI is around 4.5% above the Bank’s June forecasts, yet, as we saw last week, the terms of trade continue to ratchet lower. Currency worries aside, we suspect the RBNZ will retain the general tone of the July OCR review. This would reinforce our view the next move in the OCR is up, thus continuing to underpin the NZD through a positive interest rate differential.
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The USD was slammed on Friday. Disappointing US non-farm payrolls data saw investors scramble to price in more easing from the Fed, weighing on USD bond yields and the USD. The trade-weighted DXY index lost over 1%.
The greenback was already on the back foot prior to the jobs data. China finally delivered on the policy easing investors have been hoping for, bolstering global growth sentiment, and sapping demand for ‘safe-haven’ assets.
Chinese President Hu approved a US$156b infrastructure plan in an attempt to address the “downward pressure” still facing the Chinese economy.
The negative surprise in US payrolls wasn’t huge (96k jobs added vs. 130k expected) and the unemployment rate actually fell (to 8.1% from 8.3%). Nonetheless, it was enough for the market to price in a greater likelihood of QEIII from the Fed when they meet this week.
In the wake of the data, the weaker USD launched the EUR/USD from below 1.2650 to 1.2800 and the AUD/USD from below 1.0300 to nearly 1.0400. USD/JPY was knocked from 79.00 to around 78.20 as US-JP 2-year rate differentials continued to narrow.
The ball is now firmly in the court of the FOMC. The stakes are high. Market pricing is likely consistent with a better than even chance of another large asset purchase programme being announced. If they don’t pull the QEIII trigger, the knee-jerk reaction would likely see the USD higher, with risk-sensitive currencies underperforming.
However, if we don’t get QEIII, the Fed will likely extend the guidance of rate hikes from 2014 to 2015 and reiterate its strong easing bias. These factors may help sweeten the pill of disappointment for investors.
Outside of the FOMC, there is some important European event risk to keep an eye on this week. The German Constitutional Court will rule on the legality of the ESM on Wednesday. This approval is widely expected to be signed off. If it isn’t, the EUR/USD and risk assets would be sold aggressively.
The Dutch elections are also on Wednesday. The latest polls suggest the popularity of the anti-Europe Socialists is fading. The risk of a EUR/USD negative result from the elections is probably fading in sync.
All up, we suspect the USD will remain heavy in the lead-up to Friday’s FOMC meeting. Meanwhile, signs of progress in Europe and expectations of policy stimulus should keep the EUR and risk currencies well supported.
Other news:
*Weekend Chinese data all prints relatively close to expectations – CPI 2.0%y/y, PPI -3.5%y/y, industrial production 8.9%y/y, retail sales 13.2%y/y.
*BOE chief economist warns QE may do more harm than good.
*UK industrial production surges 2.9%m/m in July, the fastest pace in 25 years and well above the 1.5% consensus forecast.
Event Calendar:
10 September: NZ manufacturing survey; JN GDP; CH trade balance; 11 September: NZ electronic card transactions; NZ QVNZ house prices; AU NAB business confidence; US trade balance; 12 September: AU dwelling starts; UK employment; EU IP; EU elections in Netherlands, EU German constitutional court rules on legality of ESM; 13 September: NZ RBNZ policy statement; NZ PMI; AU RBA Bulletin; EU SNB meetgs; US PPIs; US jobless claims; US FOMC meet; G20 begins; 14 September: Eurogroup meeting; US CPI; US retail sales; US Michigan consumer confidence.
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